The perils of buying now, paying later

Consumers may not have a good understanding of what they are getting into when they use a ‘buy now pay later’ arrangement, the Australian Securities and Investments Commission fears.

Buy now pay later arrangements allow consumers to buy and receive goods and services immediately but pay for that purchase over time – what used to called a lay-by. The regulator thinks providers of this service could be doing a better job looking after the interests of consumers.

ASIC says the number of consumers who have used at least one buy now pay later arrangement has increased five-fold from 400,000 in 2015/16 to more than two million in 2017/18.

Eighty-six per cent who used buy now pay later to make a purchase within the past 12 months say they plan to do so again. Users say the arrangements are easy to use, convenient and less risky than other payment options.

However, ASIC says buy now pay later arrangements create some risks for consumers if they take on debt that they may have difficult paying back. To make scheduled payments, 16 per cent of surveyed consumers delayed paying other bills, became overdrawn or borrowed money from family, friends or another loan provider.

ASIC found that 23 per cent of users made repayments on their arrangement with a credit card.

Many people who use these arrangements are young, with 60 per cent aged 18 to 34. A significant proportion describe themselves as part-time employed or unemployed.

“Our survey, consumer research and stakeholder consultation identified a real risk that some buy now payer later arrangements can increase the amount of debt held by consumers and contribute to financial over-commitment,” ASIC says.

The regulator acknowledges that providers take steps to help consumers stay in control through notifications, online accounts and mobile apps. However, “we identified instances where providers could have done more.”

ASIC says providers should ensure that consumers adequately understand the terms of their arrangements, make it clear that there is a complaints process and that customers can request financial hardship assistance. They should also ensure that merchants act consistently with guidelines supplied by the provider.

Consumer protection under the National Consumer Credit Protection Act does not apply to buy now pay later arrangements. Providers do not need to hold an Australian Credit Licence, nor comply with responsible lending obligations.

“We consider that ASIC’s proposed product intervention power should apply to all credit facilities regulated under the ASIC Act, which includes buy now pay later,” ASIC says.

Only one in six providers in the review examined the income and existing debts held by consumers before providing their services. Some consumers reported being able to use a buy now pay later service despite having limited or no income and substantial existing debt.

The products ASIC reviewed included Afterpay, zipPay, Certegy Ezi-Pay, Oxipay, Brighte-Pay and Openpay. All providers charges merchants when consumers use a buy now pay later arrangement. Some also charge consumers.

They can be cheaper than credit because consumers usually do not pay interest. However, some providers charge establishment or account keeping fees, payment processing fees and late payment fees. Afterpay and Oxipay do not charge consumers if they pay on time.

The deals on offer vary considerably. Afterpay offers amounts between $1000 and $2000, and allows repayments to be made over eight weeks. Certegy offers up to $30,000 and allows repayments to be made for up to 60 months.

Missed payment fees range from $4.99 to $15. ASIC found that around 10 per cent of consumers were charged missed payment fees more than once on the same transaction in a quarter.

Each provider in the review contractually prevents merchants from charging consumers higher prices for using a buy now pay later arrangement. For lower priced goods consumers do not currently pay more for using a buy now pay later arrangement.

“However, we have received anecdotal evidence that some merchants may have charged consumers significantly higher prices for using a buy now pay later. This occurs where the price of the goods is less transparent and ‘negotiable’, such as solar panels,” ASIC says.

“These higher prices can be misleading to consumers if they are not disclosed, because they can obscure the actual cost of a buy now pay later arrangement.”

ASIC says each of the six providers included some terms in their contracts that are potentially unfair to consumers. This includes terms that:

Give the provider broad discretion to vary a contract;

Allow a very broad range of circumstances in which a consumer will be regarded to be in default of their contract;

Hold the consumer liable for unauthorized transactions; and

Give the provider a broad indemnity against losses, costs, liabilities and expenses

ASIC says it will continue to watch the sector, with an eye to any evidence that consumers are being charged more for using buy now pay later arrangements. It will encourage providers to take steps to mitigate the risk of over-commitment by capping missed payment fees, and stopping consumer making further purchases using the arrangement if they have remedied a missed payment.